Fintech Ecosystems in the Arab Region

Fintech is reshaping the financial landscape in the Arab World, recently becoming the most-active sector for startup investment in the region.

The need for financial inclusion is real. Today, the Arab World has one of the world’s lowest financial inclusion rates where almost 2-in-3 Arab adults do not hold bank accounts. The financial system’s traditional structure, comprised mainly of banks, have historically had high overhead costs deeming many individuals as not profitably serviceable

Some segments are disproportionately excluded from financial services. Women, for instance, face certain barriers and similarly, small and medium enterprises (SMEs) have limited access to financial services (mainly credit facilities).

Recently, fintech has disrupted the operations and delivery of financial services throughout the globe with more potential yet to be tapped. Through digital outreach, customized solutions, innovative credit reporting and scoring, and other methods, excluded groups are now accessing and reaping the benefits of financial inclusion.

Through partnering with fintech firms, financial institutions have reduced operational costs, extended reach to a larger target audience through remote channels and optimized their offerings by using disruptive technologies in their core operations.

The fintech industry has been gaining momentum both in terms of number of firms and early-stage investments raised. While currently representing around 1 percent of global FinTech investment, the fintech sector across the region is growing at a high rate, attracting more VCs and angel money. Nevertheless, both institutions and fintechs are still facing major challenges such as cost of regulatory compliance, lack of growth investment capital, or unavailability of qualified talent.

The Ecosystems section of our platform offers a comprehensive analysis of the fintech ecosystem across many countries in the Arab World. We look into the general country overview, the 5 pillars of an ecosystem, major investors and fintechs in the space as well as latest regulations and initiatives. The Ecosystem page of FinX22 is still being prepared and will go live towards the end of September 2020.

Fintech regulatory regimes started emerging in the Arab region in 2017. Since then, the region has become a hotbed for Fintech activity and regulatory development, with several jurisdictions competing to establish themselves as the FinTech hub in the region. To deal with regulatory and compliance complexities, many regulators in the Arab World launched Regulatory Sandboxes to test the innovative products and provide licensing paths for the emerging solutions. This allowed emerging complex solutions a path to compliance and potentially unleash their ability to transform sectors and regulations.

As for capital, strides have been made by family businesses, VCs and angel investors in allotting capital to maintain the sector’s growth despite difficulty faced by fintechs in raising capital beyond their seed and Series A investments. For many, this has limited their upward potential, while for others, drove them out of business. Therefore, establishing patient dedicated funds is a must, especially for fintechs that have surpassed seed and Series A investments, and are on track to financial stability.

Fintech innovation also requires multi-faceted talent that combines both IT and entrepreneurial skills to develop a product and deliver it to the market. Therefore, curriculums and talent development programs must evolve to equip emerging talent with the right technical and business knowledge to further advance the sector with local talent. Incubator and accelerator programs as well as technical hackathons and the availability of a testing sandbox will all boost the growth of the regional fintech ecosystem.

Financial Institutions are seeking ways to benefit from deploying FinTech across their organizations. Banks are increasingly looking to use fintech across the entire value chain, from customer onboarding to SME lending, and from using artificial intelligence to improve customer service to driving greater workforce productivity. But picking the right fintechs to collaborate with and successfully implementing new technologies remain challenging for banks that have weak innovation cultures. Fintechs, for their part, need to better articulate the clear benefits of their technology and work with banks to deliver change.

Regional and country-level strategies are necessary to create an enabling ecosystem that can lead fintech adoption forward. Initiating public-private partnerships, for example, is necessary to pave the way for investments in digital infrastructure, as is collaboration between the sectors in developing local human capital. Other multi-stakeholder cooperation in the areas of mobility, accelerator programs, strategy setting and other ecosystem governing matters are also crucial. Through these efforts, these economies would effectively evolve and create ecosystems that are attractive to entrepreneurship.